This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

March 1, 2013

The Illusion of Equilibrium

From the dawn of our economic education – sometimes
beginning when we were in middle school – we were taught about the concepts of
supply and demand. At the center of those supply and demand curves lies an
equilibrium; an equilibrium which can be accurately calculated by QD
= QS or [m(x) + b]Demand = [m(x) + b]Supply.
Most of us learned such simple algebraic equations in seventh grade. The
context of a ”equilibrium” excels far beyond what the average person may think.
This equilibrium continues as an overly complex and highly ambiguously
understood concept.

The history of
economics revolve around the idea of equilibrium and done so since the early
theories of Leon Walras and Stanley Jevons. Leon Walras (in 1874) conceptually
founded the ideas of marginal utility when he drafted a hypothetical economy
using a series of equations that equaled the number of unknowns. Equilibrium
prices and quantities solve this system of complexity and demonstrate prices
and quantities drive the economy towards equilibrium. Stanley Jevons was the
first to formulate economics as a mathematical science in the early 1860s by
formulating the ideas of economic utility.

Economics has since
then improved upon these concepts and added more equations to the pool of
useful calculations. Economics has since
been referred to as a science, in relation to that of physics, more so today than
ever before. Conventional economics, or orthodox economics, deals with the
concept of equilibrium, and other mathematical concepts, as objective facts–absolute
certainties. From this perspective we can better identify the mainstream
economic profession as a static representation of a dynamic and changing field
of study. In other words, the orthodox view of economics, or the dominant
school of thought, may place itself in a limited bubble of knowledge and
exploration.

To further explain the
concept of equilibrium, we turn to what is referred to as the “evenly rotating
economy.” The concept of an evenly rotating economy dates back to Ludwig Von
Mises who used such a phrase to describe a static economy. The “evenly rotating
economy” analogously creates a situation in which all persons stop deliberating
the many factors within a situation and proceed to perform an action in a
general way. To simplify, all economic
functions perform themselves in a robotic process with all other things equal.

As we know, however,
the economy is not a machine and it certainly isn’t a chessboard with people
being manipulated. Instead, one should view the economy as an ecosystem—a
community of living and dynamic organisms. The people involved in an
economy—which includes everyone—interact and interconnect with each other in
more than one way every second of everyday.

We know that economics studies what it means to be human: to
make choices based upon a set of preferences. These preferences are selected
upon how they themselves interpret them because humans interact differently
from day to day. Value is subjective and individual desire changes for every
circumstance. Actions occur in individual’s minds and any attempt to
subjectively measure such decisions is inaccurate.

Equilibrium can only exist when there remains perfect
information. The decision maker must have perfect knowledge regarding the
choice he or she made. The knowledge one has acquired must become more and more
concrete as time passes. This equilibrium will only last as long as
anticipations and expectations prove correct. Executions of plans are as a
result of relevant knowledge and any change in that knowledge disrupts the
equilibrium.

“All
propositions of equilibrium analysis, such as the proposition that relative
values will correspond to relative costs, or that a person will equalize the
marginal returns of anyone factor in its different uses, are propositions about
the relations between actions. Actions of a person can be said to be in
equilibrium in so far as they can be understood as part of one plan” (F.A.
Hayek 36, Individualism and Economic Order).

Equilibrium is
impossible to achieve because individuals are constantly changing wants,
desires and actions. Dissatisfaction in expectations always occurs for many
every day. Macro fluctuations in micro foundations interrupt ecological
processes that may lead to a complex equilibrium. Stability and complexity lay the
foundation for a mixed economy; however, it may appear that such stability is
difficult to achieve given the ecological differences in human desires.

In the end, economics
is not physics. Economics, if anything, is an art; an art of future predictions
based upon hypothetical models and calculations. To think otherwise is an
insult to the physics profession and the knowledge we have gained through actual
experimentation.

As Mises says,
“What they are doing is vain playing with mathematical symbols, a pastime not
suited to convey any knowledge.”